Blue Dogs Eye New Financial Reform

Conservative Democrats tout alternative plan

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President Barack Obama sternly warned Wall Street against returning to the sort of reckless and unchecked behavior that threatened the nation with a second Great Depression, Monday, Sept. 14, 2009. No major bank CEOs were there to hear his speech.

Updated at 3:47 AM CST on Monday, Sep 21, 2009

Blue Dogs and other conservative Democrats — uneasy with a key element of President Barack Obama’s plan to regulate Wall Street — are rallying around an alternative proposal that scraps the consumer financial protection agency the president has been pushing.

Rep. Walt Minnick, a freshman Democrat from Idaho, has floated the new plan. Instead of creating a new federal agency to protect consumers from predatory financial firms and shoddy products, Minnick’s plan would have existing state and federal regulators work together in a “consumer financial protection council.”

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“We’re trying to come up with something that will achieve the objectives of what the White House is asking us to do without creating a new stand-alone federal regulator,” Minnick told POLITICO.

He said his alternative proposal, which is not finished, still meets the goal of creating uniform consumer protections across the spectrum of financial institutions. The council’s authority would cover the “entire landscape” of financial products, including those offered by nonbank institutions, like mortgage lenders, that have gone largely unregulated.

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Financial reform has become second only to health care on the Obama administration’s agenda, according to industry lobbyists. And the CFPA remains a main focus for Obama, who highlighted the need for the new agency in a big speech to Wall Street last week and again in his Saturday radio address.

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“While many folks took on [larger mortgages] than they knew they could afford, too often folks signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth,” Obama said. “That’s why we need clear rules, clearly enforced. And that’s what this agency will do.”

But his plan has stirred concern in the Democratic Caucus as well as among moderates on Rep. Barney Frank’s Financial Services Committee. Aides say these more conservative Democrats worry about the scope and effectiveness of the proposed watchdog.

The administration’s proposal has been a regular topic of discussion at meetings of the Blue Dog Coalition for some time, with members skeptical about creating a new bureaucracy as the best way to fix the problem, a senior aide said.

Frank delayed a markup on the CFPA, originally slated for late July, until October, but the extra time has clearly not quelled opposition.

Community bankers, in particular, are fueling the CFPA criticism in Congress, warning that yet another layer of regulation and examination atop an already heavy burden could crush them. They are an important voice in rural districts like those represented by Minnick and some Blue Dogs — districts where small banks keep credit flowing to local businesses when the big banks tighten credit.

“The basic consensus among many of the Blue Dogs and, I’m sure, others is that [with] this new agency and the language that Chairman Frank is proposing, we’re punishing our independent community banks, and they’re really not the ones who got us into this mess,” said one Blue Dog’s chief of staff.

“So we’re looking at some alternatives, and I expect we will be supporting wholeheartedly the Minnick alternative.”

CFPA critics also question the wisdom of separating consumer protection from safety and soundness enforcement, another major objection from the financial industry.

Consumer protection rules have safety and soundness implications, and vice versa, Minnick said. If the two missions are separated, “it’s going to be hard for that regulator to maintain a balanced perspective and harder yet for the two agencies to reconcile potential conflicts of regulation,” he said.

“That puts the financial institution in a difficult position,” he said, because of the prospect that a firm will be told by one regulator to do something while the consumer watchdog tells it something that at least partly conflicts with the first set of instructions.

Minnick discussed his proposal at length with Frank at the end of last week and plans to sit down with the chairman and committee staff as soon as his proposal is done, possibly as early this week.

“He’s certainly open to talking about it; I think certain aspects of this approach he’s skeptical about,” Minnick said.

Minnick said he wants to work within the committee process, not in competition with it.

“I’m trying to serve as a broker and a catalyst to the process, within the confines of the Financial Services Committee,” he said.

A 67-year-old freshman from Idaho seems an unlikely deal maker for a contentious financial issue.

But Minnick has extensive professional experience in the world of finance and a lot of credibility among House Democrats on the issue, including Frank, aides say.

Early on, the chairman tapped Minnick, who also has a degree in economics and a Harvard MBA, to work on drafting new rules for derivatives, another major part of the financial reform package. Minnick has hands-on experience crafting the complex financial instruments, which companies use to hedge risk, from his time as a timber industry executive. He’s also helping with the systemic risk portion of Frank’s bill.

The first Democrat to represent Idaho in 14 years, Minnick also knows what it takes to get conservative Democrats, and even Republicans, on board.

And that’s what Minnick wants to do, not just with the consumer protection piece but in service of the larger financial reform effort.

“There’s a lot of criticism of this aspect of the larger [financial reform] bill. If we can remove that criticism and come up with an approach that is more broadly supported, it will make it easier to pass the entire bill,” he said.

Consumer advocates and liberal members of the House Financial Services panel won’t like Minnick’s pitch. They insist that only a new agency focused exclusively on protecting consumers will work, arguing that existing regulators will never see consumer protection as a top priority.

The Treasury Department also argues that the current system of consumer protection in the financial industry is so structurally flawed that only a new agency can set it right.

Under Minnick’s alternative, the consumer protection council would be charged with implementing uniform standards as well as coordinating enforcement and rulemaking among the primary financial regulators.

It would have 180 days of the legislation becoming law to Congress on gaps in existing laws and regulations that are letting financial institutions get away with unfair and deceptive practices. The council’s report would also recommend what statutory steps Congress should take.

The council would include the heads of federal bank and financial regulators, including the Federal Reserve, the Federal Deposit Insurance Corp, the Securities and Exchange Commission and the National Credit Union Administration; the Federal Trade Commission; the Department of Housing and Urban Development; and liaisons from several related state advisory boards.